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Bitcoin exchanger loopholes

Even if I think that the bitcoin is a great currency technology, I still don’t think that not having a centralized issuing authority is a good idea. It took me a couple of experimentations with several exchangers to find out why I wasn’t feeling it… actually I found out that not having a centralized issuing authority actually makes everyone a centralized issuing authority with the greed that could come with it. Let me show you by two examples.

First, you have :
exchanger A on which you have 1000$ on it and the bid/ask prices are 80$/100$ and
exchanger B on which you have nothing and the bid/ask prices are 120$/140$.

Thus, you look at it and say for yourself : “Well, I think that I’m sure to make some money there”. So, in the worst scenario, you buy 10 BTC at 100$ each on A and you transfer them on exchanger B. That should take about 1 hour to get it confirmed and, supposing that the price hasn’t moved much, you take again the worst price and sell your 10 BTC at 120$ each.

Not so bad for an hour of “work”, you just made 20% on your initial investment. Actually, this is exactly what everyone would like in the stock market : knowing exactly when to buy and when to sell. Having several exchangers to trade on and a direct link between them gives you the crystal ball that you need. It makes you the third-party that bitcoin wanted in the first place to get rid of : you become the central bank of the transaction.

In that scenario, the limiting factor for an individual would be the time it takes to transfer the money to your bank account from exchanger B and then retransfer from your bank account to exchanger A that amount of money… and do it again until you’re bored or you don’t find any exchangers that have a good price difference between them. But, even then, it’s not too difficult to manipulate the price if you have a little bit of bitcoins and money on several exchangers. Since the minimum required to make a transaction could be quite low (0.1 BTC), you can gradually put several buy orders until you reach the price you want. For example, let say you want to sell at 120$, but the last transaction was at 110$ and the ask price is at 115$ now. So, you could go like this :

and wait for the buyers to reach 115$. After, you let the other transactions happen and you could have to do it again if other people ask for lower prices than 115$. Then, you do the same to reach 120$ and voilà! It might be just me, but it has worked for me the first time I did it.

Actually, for making the buy price go down, I haven’t tried it, but I would do something similar and go like this if the buy price is at 105$ and the last transaction at 110$ :

The other exchanger loophole scenario could be used by someone or a company owning several exchangers. It bypasses the withdrawing/funding bank account waiting time problem. So, if you have an exchanger, you could decide to make your client wait until their funds are in your bank account to let them trade bitcoins and you could also wait some time before funding their bank account if the clients ask for it. Well, actually, this is exactly how exchangers work and it gives you all you need to “virtually” manage all the money transactions on yours exchangers and between them. Basically, there is nothing that stops you from buying on exchanger A and then sell on exchanger B and finally transfer all the funds from B to A and so on.

I don’t know if there is anyone who has used those tactics, but I assume that if I thought about them, then it’s probably already happening.

3 thoughts on “Bitcoin exchanger loopholes”

Your argument does not account for other sellers and buyers. There is no guarantee that someone else will not sell at $100 and you cannot raise the price without waiting for him to be bought out but any number of other sellers could replace him. What you are talking about is arbitrage between exchanges, it happens all the time. Google it, it is very interesting to learn more about it.

Exchanges rely on you trusting them, they make money all day regardless of the price they earn their %, they have no incentive to collude for some short term gain.

I agree, there is not guarantee and that’s why you’ll have to re-raise several times (I had to do it twice before getting the price I wanted [10$ over]) and it was on a small exchanger. Actually, this is not a rule, I was just saying that you could try to manipulate the market a little bit if you want. The fact that the transactions are fast and that the fees are very low allows everyone to try this kind of strategy. Is it a problem? I don’t think so, but it’s quite impressive to see it work and I assumed that it could be repeated if I wanted, but I might be wrong.

On another note, I wasn’t aware of the arbitrage practice. You’re right, it’s interesting. Actually, I talked a little bit with someone else before my post and he sent me on this site http://www.bitfinex.com
which would be kind of what I was talking in this post.

Well, I don’t know if they collude, but if I was mtgox (which has a bunch of exchangers with different currencies), I would buy and sell as long that there is a value imbalance between the exchangers.